💵 Themes, Memes and Dreams

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As is our want, the other day, Tim and I, had a conversation about the news flow and in particular, the story that Amazon was to increase the number of lay-offs it planned to make during Q1 2023, with around 18,000 roles now scheduled for the chop.

As ever we went off on a couple of tangents to the main topic.  Bouncing ideas and comments off of Tim is always interesting, because 9 times out of 10 some interesting thoughts and lines of inquiry are thrown up and this conversation was no exception to that rule.

I pointed out that a long-held benchmark of mine was the idea that the point at which Amazon moved to automate its warehouse and logistics operations, replacing its “worker bees”, with robots was the point at which the world of work would change for good.

My thinking being that at this point, the cost of deployment of the robots would likely be lower than the cost of employing human beings: A position that has been influenced by the work of academics such as Carl Benedikt Frey who wrote a highly regarded paper on the future of employment back in 2013.

Tim was sceptical about the rise of our new robot overlords, positing that technological change can often create more employment opportunities than it destroys.

And there is some truth to this. After all, computers have been a thing since the mid-1940s when GPO engineer Tommy Flowers took ideas from Alan Turing's code-breaking Bombe, and built Colossus, the world's first programmable electronic computer.

Almost 80 years later the computer is ubiquitous in daily life, and the industries that have formed around them employ millions of people and generate billions in GDP each year.

That set me thinking because finding the next big thing is the way for investors to turn a few thousand dollars into millions.

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For a perfect example of this look at the chart below of the 30-year percentage returns from Microsoft (MSFT) which at their peak in November 2021 were more than 12,000%.

Chasing these themes, memes and dreams is not an easy business. Separating fact from wishful thinking (fiction) is just the start.

For example, when I started in the city back in the mid-1980s, the papers were full of predictions that hypersonic space planes would, in a matter of years, carry passengers from the UK to Australia, in just a few hours, and a hop to New York would be quicker than the daily commute.

In the late 80s, the prospect of limitless power came to the fore once more, as scientists claimed to have induced fusion reactions at room temperature, so-called cold fusion.

Fusion power had been a holy grail since Edward Teller conceived the idea of a hydrogen bomb soon after WWII, ideas which came to fruition with the detention of Ivy-Mike in 1952.

But as with accessible hypersonic flight, creating sustainable hydrogen fusion has eluded scientists and the population at large to this day.

Even when an idea becomes a practical reality we still need to be able to separate what's real and achievable, from what’s just really just jam tomorrow or optimistic investor projections.

Don't forget that electric vehicles are nothing new. Here’s an example from 1904.

Equity in all things

We have talked before about what exactly constitutes equity in a business, but as a reminder, we can define it as the value attached to an enterprise over and above its physical assets, cash, plant and order books. Think of goodwill, brand recognition and reputation, to which we can add... the belief in the future prospects of the company, among equity investors.

That belief manifests itself in the PE multiple that investors are prepared to pay to own a stake in that future prosperity.

Tesla (TSLA)

The charts above, which are drawn from Macrotrends, show the stock price, earnings per share and PE ratios for Tesla, over the previous 5 years. At one point in Q4 2020 Tesla traded on a PE ratio that was north of 1000 times its earnings.

In other words, at that point in the company’s lifecycle, an investor had to be prepared to wait for a 1000 years for Tesla’s 2020 level of earnings to “pay back” their investment.

It's worse than that because Tesla is a dyed-in-the-wool growth stock. It does not, and may never, pay a dividend.

Clearly, this was bubble behaviour and to put that in some kind of context the 10-year average, forward PE, for the S&P 500 index, in December 2022 was 17.1 times and even at its peak, in Q4 2020, the indices PE ratio topped out at 38.23 times.

S&P 500 PE Ratio

Effectively what investors in Tesla were doing, if they bought into the company during Q4 2020, was buying a long-dated option on Tesla’s future success.

However, that option was so far out of the money that the chances of seeing a return on that premium were slim to none.

Time value decays within options even those with a far-dated expiry.

In hindsight, (and, at the time, let's be honest) it's obvious that Tesla should never have traded at PEs of 1000 times and more, or at a market cap that was a multiple of the rest of the auto manufacturers combined.

What happened here is classic bubble behaviour but more than that, what we saw was a yawning gulf between investor perceptions and reality.

A credibility gap if you will where investors lost touch with what was achievable and instead chose to focus on media hype and wishful thinking.

That was a period where price gains in Tesla relied on the greater fool theory supported by a constant background chant from the crowd of “this time it's different”, which of course it never is.

Let's not repeat those mistakes

We are now at a point in time where new technologies such as quantum computing and advances in the quest for self-sustaining fusion reactions, hold the promise of tremendous leaps for the whole of mankind. And yet in each case, the real sea change could be decades away and require tens if not hundreds of billions of dollars of investment to be realised.

Yes, quantum computers exist, but they are incredibly fragile and error-prone and subject to all kinds of external interference. At the moment, they can only operate under strictly controlled laboratory conditions, which is also where we are with the quest for fusion power.

Yet there are allied technologies that are being used in the real world right now, as this article from Ars Technica on D-Wave’s (QBTS) alternative and pragmatic approach to deploying quantum problem-solving in the real world tells us.

Despite that, D-Wave stock has fallen by -88.8% since August 22...

But then it doesn't have Elon Musk as its CEO or the billion-dollar PR and media machine associated with his unique brand.

That may turn out to be a good thing for D-Wave in the longer term.